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Return address: Koncernregnskab & Skat, Norregade 21, 0900 Kobenhavn C
Larry Spirgel
Assistant Director
Division of Corporate Finance
US Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Mail Stop 3561
October 16, 2006
eh
Re.: TDC A/S - Form 20-F for Fiscal Year Ended December 31, 2005,
Filed June 27, 2006 - File No. 1-12998
Dear Mr. Spirgel,
We would like to acknowledge the receipt of the Securities and Exchange
Commission's (the "Staff") letter (dated September 15, 2006) with respect to
compliance with applicable disclosure requirements for our Form 20-F for the
fiscal year ended December 31, 2005.
The headings below correspond to the headings set forth in the comment letter
of September 15, 2006. The Staff's comments are highlighted in bold below
followed by the Company's responses.
Item 5. Operating and Financial Review and Prospects, page 42
Results of Operations by Business Line, page 46
Comment 1:
We note that you discuss your results of operations using measures that
exclude the impact of special items. It appears to us that you should
present and discuss the measure of profitability disclosed in your
segment footnote in accordance with IAS 14 (operating income), rather
than a measure that excludes certain charges. Please revise your
discussion of results of operations by business line in future filings or
advise us.
Response 1:
As mentioned on page 47 we evaluate business line performance based on
results adjusted for special items. We believe that the special items
excluded from business line results do not reflect the underlying
fundamentals of the business, and should be analysed separately.
Therefore, the figures included in the tables for each business line,
and the related discussions of results, have been adjusted to exclude
the impact of spe-
TDC A/S Corporate Accounting & Tax Internet
Norregade 21 Tel.+45 33 99 81 60 www.tdc.dk
DK-0900 Kobenhavn C Fax +45 33 99 67 96 E-mail:
Tel. +45 33 43 77 77 eh@tdc.dk
Fax +45 33 43 76 18
cial items previously discussed elsewhere in Item 5. We have in a
footnote to each table relating to our Business lines provided narrative
information to allow reconciliation of adjusted results to results on an
as-reported basis in the segment footnote on page F-21.
We will in future filings in Item 5 include special items as well as
result of operations (operating income) in the tables for each business
line. This will allow for a reconciliation of operating income included
in the tables in Item 5 to the segment results in the footnote included
in the F-pages.
Item 15. Controls and Procedures, page 92
Evaluation of disclosure controls and procedures, page 92
Comment 2:
We note your disclosure that your disclosure controls and procedures are
"effective to provide reasonable assurance that information required to
be disclosed in the reports we file and submit under Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported
as and when required". Please clarify that your disclosure controls and
procedures also are effective to ensure that information required to be
disclosed in the reports that you file or submit under the Exchange Act
is accumulated and communicated to your management, including your
principal executive and principal financial officers, to allow timely
decisions regarding required disclosure. See Rule 13a-15(e) of the
Exchange Act. Alternatively, you may simply state that your disclosure
controls and procedures are effective. In addition, please revise your
disclosure in future filings.
Response 2:
We confirm that our disclosure controls and procedures are also effective
to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal
financial officers, to allow timely decisions regarding required
disclosure, cf. Rule 13a-15(e) of the Exchange Act.
We will revise our disclosures in future filings accordingly.
Statements of Cash Flows, page F-6
Comment 3:
Tell us why you presented your statement of cash flows with operating
income as the starting point. Tell us how your presentation complies with
IAS 7 and what relevant information you are trying to convey through this
presentation.
2
Response 3:
We have presented our cash flow statement with operating income as the
starting point because we believe this is the subtotal that is the most
closely related subtotal to cash flow from operating activities.
According to IAS 7.20, first paragraph, net cash flow from operating
activities is determined by adjusting profit or loss for the effects of:
a) changes during the period in inventories and operating
receivables and payables;
b) non-cash items;
c) all other items for which the cash effects are investing or
financing cash flows.
In a number of IFRS standards, the term "profit or loss" is taken to mean
profit after taxation or "net income". In IAS 7, however, we believe that
the meaning of this phrase is unclear. This is evidenced by the fact that
Appendix A to IAS 7 provides an illustrative format for the cash flow
statement where the reconciliation to cash flow from operating activities
begins with profit before taxation, and not net income. While the
Appendix is for guidance only and does not form part of the Standard, we
believe that it would be unusual to offer official guidance on the
application of a Standard that is contrary to that Standard's specific
requirements.
Accordingly, we believe that we comply with the requirements of IAS 7.20.
Note 1 - Significant Accounting Policies, page F-9
Revenue Recognition, page F-13
Comment 4:
Describe for us in more detail and disclose, in future filings, your
revenue recognition policy regarding contract work in process. Explain
the nature of the transactions to which you apply the percentage of
completion method.
Response 4:
Revenue and costs from Contract work in process are recognized based on
the percentage of completion method. Our accounting policy for contract
work in process is further explained on page F-15 and F-16 in our Form
20-F for 2005:
"Contract work in process
Contract work in process is measured at the selling price of the work
performed and recognized under receivables. The selling price is measured
at cost of own labor, materials, etc., the share of indirect production
costs and the addition of a share of the profit based on the stage of
completion. The stage of completion is measured by comparing costs
incurred to date with the estimated total costs for each contract.
3
Write-downs are made for anticipated losses on work in process based on
assessments of estimated losses on the individual contracts through to
completion.
Payments on account are offset against the value of the individual
contract to the extent that such billing does not exceed the amount
capitalized. Received payments on account exceeding the amount
capitalized are recognized under prepayments from costumers".
The stage of completion is estimated using an appropriate measure
according to the nature of the contract. As mentioned in our accounting
policy the stage of completion is measured by comparing costs incurred to
date with the estimated total cost for each contract. We believe this
method measures reliably the work performed.
The percentage of completion method relies on estimates of total expected
contract revenues and costs, as well as reliable measurement of the
progress made towards completion. Unless the financial outcome of a
contract can be estimated with reasonable certainty, no attributable
profit is recognized.
Revenue from work in process comprises long-term contractual arrangements
primarily related to installation of telephone systems, IT systems,
system integrations and other business solutions, etc.
We will in future filings expand our revenue recognition policy regarding
contract work in process.
Comment 5:
Tell us and disclose, in future filings, the types of transactions for
which you act as a principal and the transactions for which you act
as an agent.
Response 5:
Revenue is recognized on a gross basis when we act as a principal with
assuming the risks and rewards of ownership of the services. In the major
part of our transactions we act as a principal.
Revenue is recognized on a net basis when we act as an agent without
assuming the risks and rewards of ownership of the services, e.g. when
invoicing end-customers for third-party content services and use of
premium rate numbers. The net recognition of content services takes place
because the content provider makes price decisions and takes full
responsibility of providing the services. Furthermore, the content
providers have the credit risk.
We will in future filings disclose the types of transactions for which we
act as a principal and the types of transactions for which we act as an
agent.
4
IAS 18 does not include specific guidance on when revenue is recognized
on a gross basis when we act as a principal or recognized on a net basis
when we act as an agent. Therefore we use the guidance set out in EITF
No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent". The assessment on whether to recognize on a net or gross basis is
based on whether:
o we act as principal in the transaction,
o we take title to the products
o we have risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns, and
o we act as an agent or broker (including performing services, in
substance, as an agent or broker) with compensation on a commission
or fee basis.
Marketable securities, page F-16
Comment 6:
We note your disclosure that all fair value adjustments are recognized
in the Statements of Income. Please clarify how you have classified your
investments under IAS 39 for IFRS and SFAS 115 for US GAAP. Tell us how
you have considered any differences in your US GAAP reconciliation.
Response 6:
All marketable securities are classified in accordance with IAS 39,
paragraph 9 as held for trading. In accordance with IAS 39, paragraph 9
(a)(i), a financial asset is classified as held for trading if it is
acquired or incurred principally for the purpose of selling or
repurchasing it in the near term.
All marketable securities have been acquired with the purpose of selling
them in the near term.
The treatment under IAS 39 complies with SFAS 115 paragraphs 12(a) and 13
regarding trading securities and consequently there is no reconciliation
item to US GAAP.
Provisions, page F-17
Comment 7:
We note your disclosure that when you are obligated to demolish an asset
or reestablish the site where the asset was used, a liability is
"recognized in the Statements of Income". Clarify for us where you
record the offset to the liability and tell us your basis in the
accounting literature for your policy.
5
Response 7:
In our accounting policy for Provisions we state that "When the Group is
under an obligation to demolish an asset or re-establish the site where
the asset was used, a liability corresponding to the present value of
estimated futures costs is recognized in the Statement of Income".
However, the liability is recognized in the Balance Sheet and is included
in the items "Provisions" cf. also the item "Asset retirement
obligations" in footnote 24 to the consolidated financial statements
(page F-43). The offset to the liability is recorded in the Balance
Sheet, and is included in the item "Property, plant and equipment".
Our accounting policy on asset retirement obligations is in accordance
with IAS 37 "Provisions, Contingent Liabilities and Contingent Assets"
and the related interpretation in IFRIC 1 "Changes in Existing
Decommissioning, Restoration and Similar Liabilities".
We will revise the wording in our accounting policy on asset retirement
obligations in future filings so it is stated that liabilities related to
Asset Retirement Obligations are recognized in the Balance Sheet.
Note 2 - Critical Accounting Estimates and Judgments, page F-19
Comment 8:
You state that a contingent asset is recognized if the certainty or
likelihood of a positive or adverse outcome is probable of occurring and
the amount is estimable. Tell us your basis in IFRS for recognizing the
contingent asset before it is virtually certain and your basis in US
GAAP for recognizing the contingent asset before it is realized.
Response 8:
Our accounting policy on contingent assets follows IAS 37, paragraphs
31-35. Contingent assets are not recognized in financial statements since
this may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, then the
related asset is not a contingent asset and its recognition is
appropriate.
No contingent assets have been recognized in the balance sheet at
December 31, 2005 or in prior years.
We will change the wording in future filings as well as expand our
present accounting policy to include that contingent assets are not
recognized. Under US GAAP we do not recognize assets before realized.
Note 3 - Segment Reporting, page F-21
Comment 9:
We note your disclosure indicating that your primary segments are
presented on the basis of activities. It is unclear to us how
6
your presentation of primary segments represents different business
segments, as defined in paragraph 9 of IAS 14. In this regard, we note in
your description of your business on page 33 that your "TDC Switzerland"
segment's activities include mobile telephony and sales of landline and
internet services. Describe for us how you applied the guidance in IAS 14
in identifying your primary and secondary segments. In addition, tell us
what information the table entitled "TDC Mobile International, primary
segmentation" on page F-22 is intended to convey.
Response 9:
Identifying our primary and secondary segments
Our management structure and monthly financial information to the Board
of Directors and the Executive Committee are the primary basis for
identifying the predominant source and nature of risks and differing
rates of return facing our entity, and, therefore, for determining our
primary and secondary reporting format for segment reporting.
The risks and returns related to the TDC Groups activities are affected
predominantly by differences in the services provided. Consequently, our
primary format for reporting segment information is our business
segments, and secondary segment information is reported geographically.
We have determined our business and geographical segments as the
organizational units for which monthly financial information is reported
to the Board of Directors and the Executive Committee as well as the
senior operating decision makers for our individual business segments,
for the purpose of evaluating financial performance and to allocate
resources.
The monthly financial information for the TDC Group to the Board of
Directors and the Executive Committee as well as the senior operating
decision makers includes the following business segments:
o TDC Solutions
o TDC Mobile International
o TDC Switzerland
o Other activities
When evaluating financial performance we focus on operating results
de-fined as Operating income before depreciation, amortization and
impairment losses for each business segment mentioned above.
Our business segment TDC Switzerland
Paragraph 28 of IAS 14 states that the predominant source of risks and
returns determines how the entity is organized and managed. Further it
states that an entity's organizational and management structure and its
internal financial reporting system normally provide the best evidence of
the entity's predominant source of risks and returns for purpose of its
segment reporting. Therefore, except in rare circumstances, an entity
will report segment information in its financial statements on the same
basis as it reports internally to key management personnel.
7
As mentioned above monthly financial information regarding TDC
Switzerland is included as one business segment in the monthly reports to
the Board of Directors and the Executive Committee as well as the senior
operating decision makers. This reflects how the entity is organized and
managed, as well as how the Board of Directors and the Executive
Committee in TDC Switzerland as well as TDC monitors the Swiss business.
Neither the reporting to the Board of Directors and the Executive
Committee for TDC Switzerland nor the Board of Directors or the Executive
Committee for the TDC Group includes information on Operating income
before depreciation, amortization and impairment losses other than for
TDC Switzerland as a whole.
The monthly financial information for TDC Switzerland includes and
comments on revenue, transmission costs and raw materials as well as
gross margins for the product lines Mobile telephony, Landline telephony
and Internet services.
No expenses other than transmission costs and raw materials are allocated
to the underlying product lines. Instead all TDC Switzerland external
charges, such as expenses to customer care, marketing and sales,
IT-functions, administrative functions, etc. are analyzed by each cost
category under TDC Switzerland as a whole.
According to paragraph 18 of IAS 14 such costs may have been allocated to
the underlying product lines for internal financial reporting purposes on
a basis that is understood by entity management but that could be deemed
subjective, arbitrary, or difficult to understand by external users of
financial statements. Therefore, such an allocation would not constitute
a reasonable basis under the definitions of segment expenses (and segment
assets and segment liabilities as well) in IAS 14. Further paragraph 48
of IAS 14 states it is not appropriate to force allocation of entity
asset, liability, revenue, and expense items that relate jointly to two
or more segments, if the only basis for making those allocations is
arbitrary or difficult to understand.
However, we can inform you that no financial information is available at
any lower level (cf. paragraph 32 (b) and 32(c) of IAS 14) showing
allocated expenses or Operating income before depreciation, amortization
and impairment losses for the underlying product lines. Nor do we have
IT-systems that could support such cost allocation and reporting.
Therefore, in accordance with paragraphs 16-18 of IAS 14, we have not
allocated expenses other than transmission costs for internal financial
reporting purposes. Finally, if such allocation was possible, we consider
the basis for making those allocations arbitrary or difficult to
understand.
Each reporting period we assess our reportable segments in accordance
with IAS 14 to take into account any organization changes or other
relevant factors. In addition, we expect to reassess our segments
pursuant to the requirements of ED 8 once the final standard is issued.
Accordingly, we monitor our segments on an ongoing basis pursuant to the
requirements of IFRS.
8
Our business segment TDC Mobile International
The table entitled "TDC Mobile International, primary segmentation" on
page F-22 is intended to convey a sub-specification of the business
segment "TDC Mobile International" shown in the table "Activities -
primary segment". The mobile businesses "Domestic operations" and
"European network operators" are both network operators as opposed to
"European services providers". Network operators are subject to risks and
returns that are different from service providers. Domestic network
operators and European network operators are disclosed separately as this
is considered to be relevant additional information for our investors.
The monthly financial information to the Board of Directors and the
Executive Committee for the business segment TDC Mobile International
includes information about Operating income before depreciation,
amortization and impairment losses for Domestic operations, European
network operators and European services providers.
Comment 10:
It appears that you should separately present the results from
discontinued operations for each reportable segment, based on paragraph 52
of IAS 14, and a reconciliation of these amounts to entity profit or loss
from discontinued operations. Please revise, in future filings, or advise.
Response 10:
Paragraph 52 of IAS 14 states that an entity shall disclose segment
result for each reportable segment, presenting the result from continuing
operations separately from the result from discontinued operations.
Discontinued operations include TDC Directories that was disposed of in
2005. Up to 2004 TDC Directories was a separate reportable segment. No
discontinued operations are included in other reportable segments for
2005. Consequently there is no result from discontinued operations in the
reportable segments in 2004 and 2005. Hence, it is possible to reconcile
the column "TDC Group" in the segment footnote on page F-21 to the
Statement of Income on page F-5. The result from continued operations is
therefore disclosed separately from discontinued operations.
In accordance with IFRS 5, par. 33 we have in footnote 12, page F-32,
disclosed results from discontinued operations as well as revenue; total
operating costs; income taxes and gain related to disposal of
discontinued operations. We believe that we have complied with paragraph
52 of IAS 14.
Comment 11:
9
In future filings, please present a reconciliation of your segment result
from continuing operations to entity profit or loss from continuing
operations, pursuant to paragraph 67 of IAS 14.
Response 11:
Segment reporting on the pages F- 21 and F-22 uses operating income as
segment result as required by paragraph 16 of IAS 14. Total operating
income for reportable segments on page F-21 can be reconciled to
operating income in the Statement of Income on page F-5. Operating income
can therefore be reconciled to entity profit or loss from continuing
operations by adding net financials and tax. Hence we did not believe
that it was necessary to make this additional reconciliation.
However, we will in future filings present a reconciliation of our
segment results from continuing operations to entity profit or loss from
continuing operations.
Note 7 - Other income, expenses and government grants, page F-28
Comment 12:
We note that other income includes income from leases. Tell us and
disclose, in future filings, your accounting policy for recognizing lease
income.
Response 12:
Our accounting policy is that lease income from operating leases is
recognized on a straight-line basis over the lease term. None of the
lease agreements in which we are lessor are classified as finance lease.
Further, if a sale and leaseback results in a finance lease, any excess
of sales proceeds over the carrying amount is recognized as Other income
over the lease term.
We will in future filings disclose our accounting policy for recognizing
lease income.
Note 24 - Provisions, page F-44
Comment 13:
In future filings, disclose the information required by paragraph 85 of
IAS 37 with respect to each type of provision.
Response 13:
Paragraph 85(a) of IAS 37 requires information about nature of the
obligation and timing of outflows of economic benefits. According to
footnote 24 on page F-43, provisions are related mainly to pending
lawsuits, bonuses for management and employees as well as jubilee
benefits provided for employees. We believe this is an appropriate
disclosure regarding nature of the obligations. Provisions are divided in
current and non-current items based on expected outflow of economic
benefits.
10
According to paragraph 85(b) of IAS 37 an indication of the uncertainties
about amount and timing should be disclosed. We will disclose the
information required by paragraph 85(b) of IAS 37 in future filings.
Paragraph 85(c) of IAS 37 relates to expected reimbursement. We have no
reimbursement assets; hence this disclosure is not applicable.
Note 33 - Reconciliation to United States Generally Accepted Accounting
Principles (US GAAP), page F-55
f) Revenue Recognition, page F-56
Comment 14:
Please explain for us in more detail the types of arrangements that you
have accounted for under EITF 00-21 for US GAAP and describe the nature
of the reconciling item, including an explanation of the differences in
your policies under IFRS and US GAAP. In addition, expand your
disclosure, in future filings, at page F-13 regarding the types of
transactions that are considered revenue arrangements with multiple
deliverables and your accounting policy.
Response 14:
The revenue arrangements include revenue from sale of costumer placed
equipment, e.g. switchboards and telephones, to our business customers.
The standard sales agreement we use states that consideration from one
element is contingent on the delivery of other elements. We have assessed
the following five revenue recognition criteria in paragraph 14 of IAS
18:
o we have transferred the significant risk and rewards of ownership
o we have retain neither continuing managerial involvement nor
control over the goods sold
o we can measure the amount of revenue reliably
o it is probable that we will receive economic benefits
o we can measure the cost reliably.
Historically we have always been able to deliver all elements. In
accordance with paragraph 14 of IAS 18 we therefore recognize revenue
arrangements with multiple deliverables as separate units of accounting,
independent of any contingent element related to the delivery of
additional items or other performance conditions.
The arrangements fulfill the four revenue recognition criteria in SAB
104. However, under US GAAP, EITF No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables", paragraph 15 such revenue from
delivery of one element can only be recognized as revenue to the extent
that this is not contingent on further delivery of other elements. Such
limitation is not included in IAS 18, and accordingly we have a
reconciliation item to US GAAP. As at December 31, 2005 a gain before tax
of DKK 3m (December 31, 2004: DKK 1m) was deferred under US GAAP.
11
We will in future filings expand our disclosure regarding the types of
transactions that are considered revenue arrangements with multiple
deliverables and our accounting policy as well.
Balance Sheet Items, page F-59
Comment 15:
Please provide us with a rollforward of equity attributable to Company
shareholders under US GAAP from December 31, 2004 to December 31, 2005.
Response 15:
The development in equity attributable to Company shareholders under US
GAAP can be specified as follows:
DKKm
---------
Equity under US GAAP attributable to Company shareholders
at December 31, 2004 39,663
Net income under US GAAP attributable to Company 7,229
shareholders
Currency translation adjustment, foreign enterprises
(175)
Reversal of currency translation adjustment, foreign
enterprises 27
Additional minimum pension liability, recognized under
SFAS 87 (174)
Tax related to changes in equity (3)
Distributed dividends (2,706)
Dividends on treasury shares 266
Acquisition of treasury shares (310)
Disposal of treasury shares 116
Share-based payment 40
------------------------------------------------------------------------
Equity under US GAAP attributable to Company
at December 31, 2005 43,973
------------------------------------------------------------------------
* * * *
The company acknowledges that
o the company is responsible for the adequacy and accuracy of the disclo-
sure in the filings;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect
to the filings; and
o the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please do not hesitate to call me on +45-33437650 if you have any
questions regarding this submission. Additionally, please do not hesitate
to contact PricewaterhouseCoopers, our independent accountants, directly
by contacting Fin T. Nielsen (lead audit partner) at +45-3945-9110 or
John Abbott (SEC designated reviewer), at (973) 236-5958.
Thank you for your consideration of this submission.
Yours sincerely,
Hans Munk Nielsen
Chief Financial Officer
Copy to: Fin T Nielsen
John S Abbott
PricewaterhouseCoopers LLP